ICBMs, Japan and Missile Defense Stocks

09/04/2017 2:56 am EST

Focus: INDUSTRIALS

Jason Williams

Editor, Energy and Capital

There’s always a solid argument to invest in defense stocks. The world is constantly at war. Somewhere, at all times, somebody is fighting. And defense companies are providing the weapons and technology that make it possible, notes Jason Williams, editor of Energy and Capital.


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But when the biggest economies in the world are gearing up for possible engagements, the revenue really starts rolling in for these companies. So, which ones are poised to profit the most from this most recent round of international saber-rattling?

According to the U.S. Department of Defense's Missile Defense Agency, our missile defense system is made up of four parts: sensor, boost, midcourse, and terminal.

The sensor segment entails satellites, forward-based radar units, sea-based and X band radar, early warning radar, and Aegis Ballistic Missile Defense (BMD) Spy-1 radar located on ships constantly patrolling the world’s waterways. This part detects and tracks airborne threats.

Boost is the newest technology. It’s got to do with things like surveillance drones (UAVs, or unmanned aerial vehicles) that fly around boosting the detection capabilities of the radar and satellites.

The midcourse segment consists of SM-3 missiles, ground-based interceptor missiles, and the Aegis BMD ships. These are all meant to blast an ICBM out of the sky well before it becomes a threat to its intended target.

Then we’ve got the terminal part. If the midcourse segment is unable to intercept a missile, the terminal part steps in to provide a final layer of defense. It’s made up of mobile, land-based high-altitude area defense missiles, Patriot Advanced Capability-3 missiles, and sea-based launch platforms.

While Ronald Reagan’s dream of lasers shooting Soviet missiles out of the sky is still just a dream, we do have a solid net covering us from attacks via ICBM. And Japan just asked us to help it build its own land-based version of the Aegis BMD.

It already has it on its ships but wants one closer to home to defend against the threat from North Korea. And it wants it even more after this week’s launch.

There are two companies that stand to benefit the most from a new system for Japan and continued strengthening of our own system. In fact, their products make up most of the U.S. missile defense system.

Lockheed Martin (LMT) makes both the Patriot Advanced Capability-3 missiles and the Aegis Combat System that drives the second two segments of the missile defense system. And it doesn’t make them cheap.

In 2014, the U.S. military spent over $1.5 billion on Aegis systems alone. Add Japan to that, and the revenues increase exponentially. The country contracted a $1.5 billion Aegis purchase back in 2015. An additional order will boost that number even higher.

And the Patriot-3 missiles run a cool $10 million a pop. Back in 2014, the U.S. spent over $300 million on them. Japan is going to want more. And so are we. At $10 million each, even a small order adds up to big revenues.

The second company that stands to benefit the most is Raytheon (RTN). Not only does Raytheon manufacture the SM-3 missiles so important in the third segment of the defense system, but it is also making the powerful radar that lets us see them before they’re an extreme risk.

The Spy-1 that’s currently in use was made by Lockheed Martin, but Raytheon has a new version of its Spy radar that boosts the range dozens of times over. Thanks to its advancements, Raytheon won the radar contract for the new Aegis systems.

And it’s what the Japanese want for their land-based Aegis BMD system. It’s also what’s going into the new Aegis BMD ships the U.S. is getting ready to deploy.

The SM-3 missiles, which can fly over 2,000 km to shoot down an ICBM, will cost around $30 million each. And you can trust that the Japanese government (and ours) isn't going to be ordering just one or two. We’re talking about billions of dollars in revenue for Raytheon from those orders.

The Spy-6 radar (the newest and best out there) is going to set the Japanese government back a substantial amount, too. The Spy-1 radar system cost around $8.6 million in 1974 — that’s $45 million in 2017 dollars. The current cost isn’t available, but you can believe it’s going to be much higher now.

All told, the U.S. spent over $13.5 billion on its missile defense systems alone in 2014. That number has continued to rise. And with the threat of an airborne attack by North Korea, it’ll likely rise even quicker in the future.

While Raytheon and Lockheed don’t get all that money, they both get a large part of it. Plus, they’re bringing in revenues from our allies (including Japan) at the same time.

I hope we don’t ever have to use those systems, but I also know an opportunity to profit when I see one. So I say pray for peace but prepare for war with smart investments in the U.S. missile defense system.

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